All you need to know about China's new FX policy

HSBC say the move does not mean that China has begun to purposely devalue the yuan.

"In an environment of soft global recovery, the benefits of beggar-thy-neighbor competitive devaluation are neither clear nor easy to reap," was the bank's analysis of the situation.

How will this affect the Chinese people?

A weaker yuan makes imported products more expensive and foreign travel more costly.

The Chinese are just getting used to their new prosperity. Shopping has become very important to them, especially shopping for imported goods. Foreign travel for its own sake, but more specifically for shopping, is central to the aspirations of China's new wealthy classes. Those who plan to study abroad, particularly at American schools, will also feel the pinch.

Is all this good or bad for the yuan's chances of a quick inclusion in SDR?

The International Monetary Fund (IMF) has welcomed the reform, which will certainly raise the prospects for the yuan becoming part of the IMF special drawing rights (SDR) currency basket sooner rather than later.

The change does not directly affect the push for SDR inclusion, but an IMF spokesman said on Wednesday that "a more market-determined exchange rate would facilitate SDR operations in case the yuan was included in the currency basket."

What's the risk?

The depreciation might trigger capital flight, dealing a blow to the stability of China's financial system. Bloomberg economists Fielding Chen and Tom Orlik reckon that a 1-percent depreciation against the dollar will suck $40 billion out of China. While $40 billion is certainly not chicken feed, with massive foreign exchange reserves, substantial bank deposits and a controlled capital account, China is well set to deal with such an eventuality.

So, what next?

The PBOC has promised more FX reform along the lines of "market-orientation" and opening up the FX market. More foreign entities are being allowed to participate in China's financial markets, and the onshore-offshore yuan exchange rate will gradually be unified.